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Buying a new car is one of the most exciting purchases of a lifetime. Unfortunately, it is also one of the most unpleasant experiences a consumer undertakes. The expedition is rife with uninformed, high pressure car salesmen. Uncovering the real dealer invoice price requires an accounting degree or a sleuth's license. Of course, your local dealer's version of your favorite model will probably be loaded with a dozen unwanted features that jack the price up 15 percent. And picking a color? Take what's on the lot or wait twelve weeks.
But there's hope. As in other industries, electronic commerce is shaking up the $1 trillion auto market where it is rapidly changing the way cars are sold and redefining the dealer role. That's good news for consumers who are likely to enjoy lower prices and -- hallelujah -- a haggle-free exchange in which the dealer takes on an advisory, not adversarial, role.
The rise of Internet-based purchasing services such as Auto-By-Tel, Microsoft Carpoint and Autoweb.com are impacting the balance of power between new car buyers, dealers and manufacturers. On-line services give consumers instant access to information such as what models are equipped with which features and at what price on a variety of dealer lots.
In a joint student-faculty effort, Stanford Business School students Jorge Borbolla (MBA '99) and Aldo Kamper (MBA '99) recently completed an auto industry research report under the supervision of management professor Garth Saloner. It examines how the Internet is altering the auto market. "We were surprised by the way such a staid industry is completely revolutionizing itself in such a short time," says Borbolla.
According to estimates from J.D. Power and Associates in the researchers' report, 50 percent of new car buyers will use the Internet to car shop by 2000, up from 16 percent in 1997. Most shoppers use on-line information as ammunition in their dealer negotiations. But a few consumers are already using the Internet to actually make a purchase. The researchers say statistics are still fuzzy but estimate 1 to 4 percent of new cars were bought through Internet services in 1997. Industry forecasts suggest the number could reach 20 percent in three years.
Manufacturers have responded to on-line services by offering their own web sites that channel queries to their dealers, who must answer with a no-haggle, competitive quote in 24 hours. So far, manufacturer web sites have been fairly well accepted among dealers. After focusing for years on manufacturing costs (which comprise only 15 percent of the cost of a car), automakers have discovered they can also improve their bottom lines at the distribution and retail levels.
Advertising and supporting an over-sized network of dealers generates up to 30 percent of the cost of a car. The Internet can help reduce costs by driving weaker dealers out of the market. The number of dealers is expected to shrink from 22,000 to 10,000 by 2005, according to statistics cited in Borbolla's and Kamper's report. The researchers also found that, according to JD Power, automakers may open factory outlets and establish new distribution channels through supermarkets and department stores within the next 10 years. Still, driving dealers out business entirely seems unlikely since state laws prohibit the automakers from selling directly to consumers.
Although many dealers consider the Internet a threat to their survival, there may be a silver lining for those who put the technology to strategic use. Despite what consumers may think, dealer margins are small. The researchers say estimates range from 6 percent of the sticker price to as little as $77 on a single car. Either way, the only way for a dealer to boost profits from sales is by cutting costs.
Internet services can cut costs significantly. For example, dealers are increasingly using salaried salespeople for their relatively well-informed, on-line customers who require less hand-holding and want less aggressive sales tactics. This way, the dealer can forego hefty commissions on sales that require less time to close. According to the research report, Auto-By-Tel claims its system cuts the average personnel cost per car from $820 to $150. It also claims dealers, which spend $3 billion a year on newspapers ads, can reduce their marketing costs from $225 to $40 per transaction.
Ironically, Internet car buying services may ultimately put themselves out of business. Once dealers lower costs, prices drop, and manufacturers enter the retail channel with fixed prices, there will be little need for consumers to use a car buying service. The online services acknowledge this, say Borbolla and Kamper, who expect these companies will make money for five to eight years. After that, the experience is likely to be applied to other offerings. Until then, on-line services profits should be good. All three car buying services expected to be in the black by the end of 1998.
Borbolla's and Kamper's technical report is just one of a collection of student reports looking at the impact of electronic commerce in 10 different areas from the travel industry to the stock brokerage business. The reports were completed for a 1998 course taught by Saloner, the Robert A. Magowan Professor of Strategic Management and Economics.
Electronic Commerce and Its Impact on the Value Chains of Selected Vertical Markets, Chapter 2: E-Commerce in the Automotive Industry by Jorge Borbolla and Aldo Kamper under the supervision of Garth Saloner. GSB Technical Report # 81, June 1998.
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